ipa engineering trends 1.ppt [compatibility mode]

Market Trends Market Trends –– A Focus on A Focus on Engineering ProductivityEngineering Productivity

Dean P. Findley

May 29, 2008

Independent Project Analysis 2008 2

Purpose

• Share information on recent market trends

• Discuss one area of market bottleneck: Engineering

• Provide recommendations for avoiding the bottleneck


Outline

• Introducing IPA

• The Setting

• Market Trends

• Engineering Productivity

• Conclusions


Independent Project Analysis

• IPA independently measures the performance of capital projects for a variety of companies

• Devoted to the analysis of capital projects as a field of empirical research

• We measure the Leading Indicators:– Front-End Loading (Project definition)– Team Effectiveness– Use of Value Improving Practices

• We help owners set and achieve goals

• IPA improves the competitiveness of its customers by helping them use capital more effectively


How Does IPA Help Improve Capital Projects?

Data

10,000+ Projects

w350+ Companies

wVarying project types

wOver 2,000 Variablesper project

Empirical Research

Statistical Analysis

w Practices vs. Results

w Project research

Transfer and Exchange of Knowledge

Performance and Plans

wBest Practices

wBenchmarks


IPA Works at Several Levels

• Individual projects form the foundation of our work

• Diagnosing (benchmarking) project systems provides companies with the basis for improvement

• Benchmarking Conferences bring companies together to share practices and metrics


Industry Benchmarking ConsortiumIBC 2008 Companies

Engenharia

Agenda - Tuesday, April 1

9:00 a.m.-9:15 a.m.

9:15 a.m.-10:00 a.m.

10:00 a.m.-10:15 a.m.

10:15 a.m.-10:30 a.m.

10:30 a.m.-12:00 p.m.

12:00 p.m.-1:00 p.m.

1:00 p.m.-2:00 p.m.

2:00 p.m.-3:00 p.m.

3:00 p.m.-3:15 p.m.

Welcome [Belmont Ballroom]

Keynote Address [Belmont Ballroom]

Break [Belmont Foyer]

Safety Metrics [Belmont Ballroom]

Industry Metrics [Belmont Ballroom]

Lunch [Potomac Ballroom/Colvin Run]

Operability [Belmont Ballroom]

Market Trends- Engineering Productivity [Belmont Ballroom]

Break [Belmont Ballroom]


Agenda -Wednesday, April 2

9:00 a.m.-9:15 a.m.9:15 a.m.-10:15 a.m.10:15 a.m.-10:30 a.m.10:30 a.m.-11:30 a.m.

11:30 a.m.-12:30 p.m.12:30 p.m.-1:30 p.m.1:30 p.m.-2:30 p.m.2:30 p.m.-2:45 p.m.2:45 p.m.-3:30 p.m.

3:30 p.m.-4:00 p.m.4:00 p.m.-4:45 p.m.

4:45 p.m.-5:00 p.m.5:00 p.m.-6:00 p.m.6:00 p.m.-7:00 p.m.

Agenda OverviewPeer Reviews and Capital EffectivenessBreakDefending the Gate: Examining Gatekeeping in a Stage-Gated Project Definition ProcessBest and Worst IBC 2008 ProjectsLunch

Break

Break

Closing RemarksIBC Steering Committee MeetingReception // Welcome Small Projects and Site Systems

Presentation by Alcoa

[Belmont I & II] Presentation by EPA

[Belmont I & II]

Commercialization of Alternative Energy Technologies

[Belmont I & II] Company Breakouts

[As Assigned]

Commercialization of Alternative Energy Technologies

[Belmont I & II] Company Breakouts

[As Assigned]

[Belmont Ballroom]

[Belmont Ballroom]

[Belmont Foyer]

[Belmont Ballroom]

[Belmont Ballroom]

[Potomac Ballroom/Colvin Run]

[Belmont Foyer]

[Belmont Foyer]

[Belmont I, II, & III]

[Sully]

[Belmont Foyer]


Outline

• Introducing IPA

• The Setting

• Market Trends

• Engineering Productivity

• Conclusions


The Projects Crisis

• We are in our 5th year of the first world-wide projects crisis in the process industries

• Barring a global economic slowdown, the crisis has years to run

• On-going and near-term spending is unprecedented– $1.4 trillion in Middle East alone– 55 projects> $100MM in Alberta– $400+ billion on USGC– Etc…

• This is no longer any fun


Harsh Reality

• Many equipment items have escalated 80 percent in the past few years and delivery times have lengthened

• Engineering shortages are spreading from all of the major engineering centers to the value centers

• Lack of FEL resources is causing a dramatic slowing of project development

• Labor shortages combined with other problems have created a growing series of project “hotspots”

The cupboard is empty:


Regional Hotspots

AustraliaAustralia

BrazilBrazil

Western Western CanadaCanada

USGCUSGC

Middle Middle EastEast

West West AfricaAfrica

Next?Next?


Issues

• How is the crisis playing out?

• How much damage will be done to– projects?– capital project systems?– companies’ futures?

• How will we respond?


Project Casualties are Mounting

• More projects are spinning out of control

• Large projects are especially vulnerable

• Projects are slowing dramatically, but not by choice and therefore not by plan

• Quality, especially engineering quality, is suffering


Causes of Failure

• Most failed projects are old-fashioned business objectives and FEL failures

• Even relatively small errors are severely punished in the current market

• However, we are seeing more genuine execution failures, an expected but new result


When Projects Fail...

• Six IBC companies have replaced their heads of engineering with contractor executives with no prior owner experience

• We are seeing several reorganizations

The Scapegoats Must be Found!

15 years of progress is in jeopardy


What Needs to be Done?

• At the Corporate Level?

• At the Project System Level?


Corporate Level

• Business education

• Trimming of the portfolio

• Capability assessment


Ground Business Management in Reality

• If your management does not understand the basics of capital projects and how business actions control capital projects, it is education time!

• If your management does not appreciate the state of the project markets and its implications, it is education time!

• If you cannot find somebody or some way of getting them to listen, dust off your résumé


Trim the Portfolio

• We continue to work on too many projects

• Trim the portfolio of:– economically marginal projects– vampire projects– projects bogged down in regulatory, political or

partner problems– projects for which the technology is not ready

• Control of the portfolio is essential, especially in decentralize companies


Assess Project Capabilities

• Inventory project staffing resources across the company

• Account for increasing attrition

• Account for the (in)effectiveness of new hires

• Provide management with a realistic assessment of how many you can develop and execute as a function of project size and complexity


Project System Level Actions

• In addition to being ever more scrupulous with the fundamentals, you need to explicitly plan to cover contractor deficiencies in– Design QA/QC– Construction QA/QC– Expediting and inspection of vendor-supplied

materials– Construction management– Project cost and schedule controls

• Suggesting that many of these are contractor responsibilities is true but a waste of time

Market TrendsA Focus on Engineering Productivity

Dean P. Findley and Luke M. Wallace


Outline

• Market Trends

• Engineering Productivity Database

• Drivers of Engineering Productivity

• Time Trends and Regional Differences

• Conclusions


0

50

100

150

200

250

300

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Bill

ions

of U

S D

olla

rs

-10

-5

0

5

10

15

20

25

Capital Spending Has Increased in All IndustriesFor Example, Global Chemical Spending

Spending (left) Year-Over-Year Change (right)

Source: Chemical Engineering, January 2008

Year

Percentage of Change


Where Is the Spending Increase Happening?2006 to 2009 Period

6%2%

17%

4%

13%

58%

North AmericaLatin America

Western Europe

Emerging Europe

Asia-Pacific

Africa and Middle East

Share of incremental gain in 2006-2009 capital

spending

Source: Chemical Engineering, January 2008


New Technology Projects Have Declined

0%

5%

10%

15%

20%

25%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Authorization Year

Perc

enta

ge o

f Pro

ject

s in

IPA

Dat

abas

e W

ith O

ne o

r Mor

e N

ew P

roce

ss S

teps

But, We Expect an Increase


Megaproject Activity Has Significantly Increased

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Authorization Year

Perc

enta

ge o

f Lar

ge

Proj

ects

Col

lect

ed b

y IP

A

% Projects > $250MM

% Projects > $500MM


Demographic TrendsLabor Force Is Aging in Many Developed Regions

0

10

20

30

40

16-24 25-34 35-44 45-54 55-64 65+

Age Groups (years)

Perc

enta

ge o

f Em

ploy

men

t

1980 2004

Source: U.S. Bureau of Labor Statistics


U.S. Engineers: Fewer Young People and Sharp Decline After Age 54

0

10

20

30

40

16-24 25-34 35-44 45-54 55-64 65+

Age Groups (years)

Perc

enta

ge o

f Em

ploy

men

t

1980 2004

Source: U.S. Bureau of Labor Statistics


Engineering Degrees by Country

0

50000

100000

150000

200000

250000

300000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Year

# of

Eng

inee

ring

Deg

rees

China Japan South Korea United States United Kingdom Germany

Source: National Science Foundation, Science & Engineering Indicators, 2006


Putting the Trends in Context

• Demand has never been greater:

– China and other developing nations are growing

– Commodity prices (oil, metals, etc.) are all relatively high

– More “megaprojects” to capture economies of scale

• Market’s ability to expand is constrained

– Demographic challenges

– Years of downsizing and contractor consolidation

– Vendors do not quickly expand production

– Construction labor reflects the region (e.g., Alberta versus China)


Supply and Demand for Capital ProjectsThe Market Cannot Respond Quickly

Supply

Demand


Supply and Demand for Capital ProjectsA Short-Run View of the Problem

Supply

Demand


Prices Have Increased A LOT !!

• Varies by cost element

• Varies by project type

• Varies by location

• Not just the increase―the volatility


Engineering Escalation Comparison

Time

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08

World Open Market Engineering

ChEPCI

Cost escalation trends are displayed in US dollars.

Tren

d fr

om J

anua

ry 2

003

(Jan

. 200

3 =

1.00

)

37


Major Equipment Cost Escalation Varies by Type of Equipment

Time

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08

Chemical/Refining: Large Fabricated

Chemical/Refining: Typical Mix

Chemical/Refining: Mostly Mechanical

Electrical & Instrumentation

Data are a composite escalation index for various types of projects Cost escalation trends are displayed in U.S. dollars

Glo

bal T

rend

Fro

m J

anua

ry 2

003

(Jan

. 200

3 =

1.00

)


0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan-04 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07

USGCSoutheastern AustraliaWestern AustraliaSouthern United KingdomNetherlandsEastern GermanyAlberta, CanadaChEPCI

Construction Labor Escalation Varies by Location

Cost escalation trends are displayed in local currency

Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08

Time

Glo

bal T

rend

Fro

m J

anua

ry 2

003

(Jan

. 200

3 =

1.00

)


0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07

RefineryLNG FacilityElectrical Distribution

Glo

bal T

rend

Fro

m J

anua

ry 2

003

(Jan

. 200

3 =

1.00

)

TimeData are a composite escalation index for various types of projects

Escalation Varies by Project Type

Cost escalation trends are displayed in U.S. dollars


• Markets do not adjust instantly– Price changes in current period are related to changes in

previous period

– Specific markets are affected by external events, but an adjustment lag usually occurs

– Understanding the adjustment lags is basis for short-run predictions

• Longer term forecasts require predictions of the external events (GDP, megaprojects, oil price, etc.)– More difficult– Adds to uncertainty

Future Market Trends-- A Few Comments --


Forecast Price Sensitivity-- An Example With Megaproject Activity --

140

150

160

170

180

190

200

210

220

2008 2009 2010 2011 2012

Base Forecast

%Mega (Decreasing)

% Mega (Constant)

Year

Pric

e In

dex

(Jan

. 200

3 =

100)


Forecast Price Sensitivity-- An Example With Metal Prices --

140

150

160

170

180

190

200

210

220

2008 2009 2010 2011 2012

Base Forecast

Metal Price (Constant)

Metal Price (Decreasing)

Year

Pric

e In

dex

(Jan

. 200

3 =

100)


Market Trends SummaryProductive Engineers Are Critical

• Market activity has increased – more projects, bigger projects, complex projects

• Costs have increased and become more volatile for many locations, project types, and cost elements

• The market trends are not likely to quickly change

• Demographic challenges are substantial, especially among the highly skilled

• Engineering is a bottleneck―how are we going to debottleneck the system?


Why Should We Care?Because Engineering Is Highly Leveraging

• Absolute Performance―Engineering services is often the category that determines overall performance

• Predictability―Engineering overruns by more than any other cost category (21 percent, on average)

• Operability―Problems executing the design are the immediate cause of field problems, delayed startups, and operability issues


Engineering Productivity Matters

14%

15%

16%

17%

Base Case Projects With 10% BetterEngineering Productivity

Del

ta In

tern

al R

ate

of R

etur

n

Schedule ImpactCost Impact Production Attainment Impact

10% Improved 10% Improved Engineering ProductivityEngineering Productivity

üü 2% Lower Cost2% Lower Costüü 3% Faster Project3% Faster Project

üü 5% Better Operability5% Better Operability


Outline

• Market Trends




• Conclusions


Updated Engineering Productivity Database More Projects, More Current

Number of Projects 992

Average Authorization Year 20041995 to 2008

Number of Owners Represented 132

Percentage of Projects With New Technology 6 percent

Estimated Project Cost (in millions of US$) $111 / $24 (mean/median)

Range of Total Project Costs $4 million to $6 billion

Number of Engineering Contractors Represented

200+

Range of Authorization Years


Refining 39%

Metal & Minerals Processing

10%

Chemicals36%

Industry Breakdown

Engineering Productivity Database

Pharmaceuticals6%


Geographical Distribution of the Projects

South AmericaSouth America5%5%

Middle EastMiddle East3%3%

OceaniaOceania5%5%

North AmericaNorth America54%54%

South AfricaSouth Africa3%3%

EuropeEurope18%18%

AsiaAsia7%7%

CanadaCanada5%5%


Development of an Engineering Index

Size

Project Type

Process Complexity Predicted

Engineering HoursNew

Technology

Inherent FactorsInherent Factors

Estimates


0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

10 100 200 300 400 500 600 700 800 900 1000

Project Size (Millions of 2003$)

Det

aile

d En

gine

erin

g H

ours

(mill

ions

)Detailed Engineering Hours

Rule of Thumb: About 1 Hour for Every $1,000

High Complexity Process

Low Complexity Process

P < 0.0001


Engineering Productivity Index

Actual Engineering

Hours

Predicted Engineering

Hours

Engineering

Productivity

Index


0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Refining

Com. Chem

Special C

hemFore

st

Pharm

s

Cons. Pro

ducts

Metals/M

inerals

Pipelines

Engineering Productivity Varies Within and Across Industries

Industries


0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

A B C D E F G H I J K L M N O P Q R S

Engineering Productivity Varies Within and Across Companies

IBC Companies


Industry and Company Differences

• Variance in engineering productivity is substantial

• What are the practices that improve productivity?

• Then we will consider regional differences and time trends


Outline

• Market Trends




• Conclusions


0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

4

4.25 4.5

4.75 5

5.25 5.5

5.75 6

6.25 6.5

6.75 7

7.25 7.5

7.75 8

8.25 8.5

8.75 9

Front-End Loading Index

Engi

neer

ing

Prod

uctiv

ity In

dex

Front-End Loading (FEL) Improves Productivity

Pr < 0.01

•• FEL StrategiesFEL Strategies•• Schedule StrategiesSchedule Strategies

•• Teams & OtherTeams & Other

DRIVERS OF DRIVERS OF PRODUCTIVITYPRODUCTIVITY

SCREENINGPOORFAIRGOODBEST


FEL Components

• A few specific FEL items are disproportionately important to engineering productivity– Basic data items, such as heat and material balances

(H&MBs), process control strategy, and instrumentation requirements

– Site-related issues> Various environmental requirements > Utilities, especially waste treatment needs


0.90

0.95

1.00

1.05

1.10

1.15

-4 -2 0 2 4 6 8 10 12

Overlap of FEL and Engineering (months)

Engi

neer

ing

Prod

uctiv

ity In

dex

Overlapping FEL and Detailed EngineeringReduces Productivity

Pr < 0.07

•• FEL StrategiesFEL Strategies

•• Schedule Schedule StrategiesStrategies




0.90

0.95

1.00

1.05

1.10

-40 -30 -20 -10 0 10 20 30 40 50 60 70 80

Percent Overlap of Engineering and Construction

Engi

neer

ing

Prod

uctiv

ity In

dex

Overlapping Engineering and ConstructionReduces Productivity

Pr < 0.04


•• Schedule Schedule StrategiesStrategies




0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80

Yes

No

Engineering Productivity Index

Formally Defined Roles and Responsibilities Is Key

+ Std. Dev.- Std. Dev.Pr < 0.024


•• Schedule StrategiesSchedule Strategies




0.80

0.85

0.90

0.95

1.00

1.05

1.10

30282624222018161412108642

Similar Projects by Engineering Lead

Engi

neer

ing

Prod

uctiv

ity In

dex

Project Experience Matters

Pr < 0.04






0.90

0.95

1.00

1.05

1.10

1.15

6 5 4 3 2 1

Project Control Index

Engi

neer

ing

Prod

uctiv

ity In

dex

Good Project Control Yields Better Productivity

Pr < 0.057





GOOD FAIR POOR


Key Practices Remain Fundamental

• Best Practical FEL– Projects achieving Best Practical FEL average a 0.95

productivity index• Overlap

– Overlapping less than 10 percent of the execution duration results in competitive productivity

• Teams– Teams with formally defined roles and responsibilities are 15

percent more productive

• Project Controls– To achieve competitive productivity, project controls need to

be at a Good level


Related Issues and Previous ResearchA Few Comments

• Automated design tools– Initial use versus ongoing improvements

• Incentivized contracts do not work• Engineering value centers

– Increasing use, but generally less productive with lower wages– Direct owner connection improves total project value

• Thinly staffed project teams– Large owner teams set the basis for good performance– Staff key positions with owner staff

• Local content requirements– Increasing issue, especially in less developed regions– More on this later


Outline

• Market Trends




• Conclusions


Geographical Distribution of Engineering Locations

South AmericaSouth America5%5%

OceaniaOceania5%5%

USUS55%55%

South AfricaSouth Africa2%2%

EuropeEurope21%21%

AsiaAsia5%5%

CanadaCanada7%7%


0.000.200.40

0.600.801.001.201.40

1.601.802.00

US Canada Europe Asia Australia SouthAmerica

Productivity Varies by Region

Engineering Region


0.80

0.90

1.00

1.10

2000-2001 2002-2003 2004-2005 >2006

Engineering Productivity Has Recently Declined, And Is Likely Getting Even Worse

Year


3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

8.50

9.00US Canada Europe Asia Australia South

America

FEL Varies by Engineering RegionSC

REE

NIN

GPO

OR

FAIR

GO

OD

BES

T

Engineering Region


0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

4 5 6 7 8 9

Front-End Loading Index

Engi

neer

ing

Prod

uctiv

ity In

dex

EuropeUSS. AmericaAsiaAustraliaCanada

FEL Is More Important in “Hot Spots”

SCREENINGPOORFAIRGOODBEST


Outline

• Market Trends




• Conclusions


Conclusions―Trends and Practices

• Market trends are not going away– Capital spending will remain high – Labor markets present the greatest challenge

• Engineering productivity is critical • Best Practices remain essential:

– FEL is a prerequisite and avoid extensive overlaps– Team alignment is important, along with experience,

continuity, and project controls


Conclusions― What About the Regions?

• Mature Project Regions:– Strengths: Project fundamentals provide a foundation– Opportunities: Reduce the variance in applying Best

Practices and recover from years of downsizing

• Emerging Project Regions:– Strengths: Economic growth and labor is generally

available– Opportunities: Project fundamentals must be improved

and training is necessary


Recommendations Things to Consider

We are in it for the long term!

• Use the current market opportunity to establish and/or rebuild owner competence

• Locate engineering centers in favorable markets

• Do not authorize fundamentally weak practices

10 percent better productivity means 10 percent fewer engineers

to achieve better outcomes !

ipa engineering trends 1.ppt [compatibility mode]

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